Heart Beats: Accelerate the Core Game Launch Process, Seek High-Quality Growth (1H22 Conference Call Minutes)

Below is the summary of Heartbeat's performance meeting for the first half of 2022. For financial interpretation, please refer to "Unexpected Surprises, Heartbeat Can Beat Again".

I. Management Report

1. Overseas TapTap

This year, overseas investment has increased with a focus on North America. Although DAU and MAU have declined, the high net worth user group has seen significant growth. We are very focused on the core player community. TapTap's overseas focus is not only on the number of users but also on the player community and expanding influence.

2. Self-developed games

(1) The first half of the year was mainly benefited from "Sausage Party". Although it has been online for many years, this year's user numbers and revenue are at an all-time high.

(2) The new games released in the first half of the year, "Party Star Flash Party" and "T3 Arena", will be considered for long-term planning and operations based on the first year of "Sausage Party". Meanwhile, we will cautiously control the investment-output ratio, expecting better growth in the future.

(3) "Torchlight: Infinity" was globally launched in October.

3. Cost expenditures

Due to environmental changes, we strictly control costs according to the plan formulated at the beginning of the year, and expect to achieve an overall balance of profit and loss in the coming year. So we calculate the investment-output ratio of each project.

The investment has been relatively conservative, with a decrease in the number of projects. Other projects are continuing as planned.

This year's main investments are TapTap International and "Spark Editor", which may have a longer investment period but have some expectations for future developments. The industry's expectations are somewhat conservative at present. Everyone's goal may be to survive, but we still hope that the company will have investments and development, and that it will lead to high-quality operations.

II. Analyst Q&A

Q: Changes to TapTap in 2022H1; Functional and User Operations Strategies; New Commercial Breakthroughs

A: There is no significant change in the product form, and growth benefits from continuous adjustments in previous years in terms of products and R&D technology, etc.

Since 2021, TapTap's strategy for algorithm recommendation has had a very positive impact on user experience and commercial monetization.

(1) User experience

The effect is not as visible in the short term, but in the long term, it has a significant impact on the core player community.

(2) Commercial monetization (advertising revenue) is relatively restrained.

• The commercial part of TapTap has always insisted on minimizing the impact on users' perception and experience.
• We care about the user experience of advertisers, optimize user bidding, and provide tools to track the effect of the advertising chain, ensuring that TapTap is the highest return on investment channel for advertisers. There is considerable room for improvement in the future.
• The iOS platform has more high-quality users, and we will pay more attention to investing in the iOS version in the future. The iOS version has not been updated for some time in the past, and we have recently redesigned and launched the iOS version. Overseas, a Google Play version was recently launched, and we will consider more versions based only on the store as a pure community without application distribution. Short-term data feedback shows that there is no significant difference in user access and retention between different versions of the app, so there are high expectations for this.

Q: The Successful Operation Experience of "Sausage Party"; Future Peak Revenue Curve of Flash Party and T3 as Similar Games.

A: [1] The Successful Operation Experience of "Sausage Party"

The key to the success of "Sausage Party" lies in the accumulation of brand and user groups.

When "Sausage Party" was launched five years ago, it was not very competitive compared to similar games in China due to the inadequate product quality, but players showed a strong interest in it. Therefore, the company continuously cultivated it from the perspective of brand and integrity during the long-term operation. For example, the overseas release of the identical "Sausage Party" has much less user volume and revenue compared with the domestic release due to the trust and social effects of brand among player groups, which has a great impact on user retention and payment.

The company believes that if other products can be operated and accumulated like this for a long time, there will be a broad space for growth in the future.

[2] Future Development of Flash Party and T3

Although Flash Party and T3 have different game types, players have a strong desire for them. Although short-term operational data show no significant competitiveness, it is not inferior to the first and second years of "Sausage Party". Therefore, the company believes that both Flash Party and T3 have the opportunity for continuous operation.

Q: Systematic Planning of the International Team

A: Allocate energy and time based on business needs. From the perspective of efficiency and cost, the Shanghai team will be the main force in the short term, and cooperation with overseas colleagues will also be carried out.

The international team has just been established and lacks a systematic plan. There are directions and goals to try and make mistakes, and we are still committed to establishing core player communities in tier one countries. (The DAU and MAU are both acceptable, but more overseas players regard TapTap as a tool.)

Q: The Number of R&D Personnel Has Decreased Year on Year, and Employee Compensation and Benefits Have Increased Year on Year. How to Consider Employee Treatment?

A: (1) Per Capita Compensation

• With the intense competition for talents in the game industry in the past few years, the cost of human resources has increased significantly, and it is expected to become more rational starting this year, so the human resources cost will not tend to rise.
• The company has carefully considered personnel salaries, the competitiveness of salaries in the industry, and input and output. At present, per capita compensation is reasonable.
• The per capita compensation of employees who stayed this year is quite good and is in the top percentile in this industry. This year, there will be a slight salary increase.

(2) R&D Expenses

Compared with 2021H2, it has decreased and slightly increased compared with 2021H1 due to severance and equity-related expenses.

In summary, personal salaries, R&D costs, and personnel numbers are positively correlated.

Q: Overall Player Payment and Activity Level in the Game Industry: Current Situation and Future Prospects

A: No changes have been found in the short term. It is similar to before. The future will change with macroeconomic conditions. Q: The proportion of marketing expenses on TapTap and other things.

A: Most of the marketing expenses invested in domestic TapTap and game-related things have a positive return.

This year, more additional investment was made in overseas TapTap, but there will be no short-term return as it has not been commercialized yet.

Q: Opinion on Tap Play business; Contribution of Tap Play to 2022H1 usage time and user activity.

A: Currently, its proportion in overall DAU and MAU is not high, but it is steadily growing.** The company has high expectations for Tap Play, but the scale is not high yet, with only a few hundred thousand DAUs.** The retention and usage time of these users will be longer in the future.

When it was launched at the end of last year, it encountered stability and user experience problems. In the future, the company will pay more attention to these two aspects and invest more time in solving player word-of-mouth and technical infrastructure issues in 2022H1.

Q: Why did advertising revenue increase against the trend in 2022H1? Can H2 maintain growth?

A: [1] Reasons for the growth of advertising revenue against the trend in 2022H1

• TapTap users are of better quality and have very stable consumption ability and gaming habits.
• TapTap is the channel with the highest cost-effectiveness (input-output ratio) for advertisers.

[2] Future outlook

• There is a lot of room for improvement in commercialization, such as in the form of advertising and algorithm optimization. Even if we do not consider user growth, there is still room for improvement in commercial efficiency.
• There is more room for user growth. For example, if the iOS version has a corresponding equal increase, the commercial value of iOS users is very high.

Q: Future game development direction (big DAU or games that are more focused on intensity and numerical items, i.e., games with stronger commercialization ability?)

A: Both are considered. There are games with a large DAU and fair competitive pay-to-play games such as "Flash Party" and "T3", as well as more traditional and card-based payment products like "Torchlight Infinite" and "Linglan Sword."

It is more inclined to traditional commercialization under the premise of meeting players' expectations, striving for better word-of-mouth, and developing long-lived products. The company will try to balance the two, but regardless, the gameplay, payment, and user structure of more traditionally commercialized products will be more intense.

Q: Development plan for Spark Editor

A: Spark Editor is a long-term project that has been invested in since 2021. As TapTap, the purpose of doing this infrastructure is to make it easier for more ordinary users, such as independent developers and small and medium-sized studios, to create games.

Currently, efforts are being made to make domestic developers more familiar with the Spark Editor so that developers can launch products and achieve good revenue overseas. In China, after the game gets a version number, the creator ecosystem can recycle very healthily.

Q: Progress of Heartbeat Town

A: When it was designed, the goal was set too high (to allow players to have greater freedom in life simulation games), so there were many challenges during development. Recently adjusted the project and shrunk the target, keeping a small and fast pace to quickly launch the test. Continuously adjusting and gradually improving during the interaction with players.

The current goal is to conduct a bonfire test on TapTap this year, and adjust the target during the test; the global official release will be next year.

Q: Considerations for short video functions on TapTap.

A: Currently, we have tried it, but it is not defined as short videos. We have achieved certain results this year, but the contribution to the overall market is relatively small. The company values long-term ecological construction. If creators can contribute high-quality content, it is also beneficial to the manufacturers. If it can be repeated, there is great potential in commercialization. We do not currently view it from a purely commercial perspective but instead view it from a community ecological perspective, which values creators and user value more.

The proportion of videos on TapTap is increasing, and there are plenty of game-recommended videos created by players on the homepage, which is very effective. The Creator Center has been launched, and synergy has been formed between manufacturers and creators- creators produce video content for manufacturers. This has received a lot of positive feedback from the test, and this is the company's future direction.

Q: Measures to attract talents; unique mechanism for self-research and transformation?

A: [1] Measures to attract talents

1. The company's greatest advantage for creative talents comes from the core management team's love for and understanding of games. At the same time, thanks to TapTap, the company has a deep understanding of player needs.

2. Synergy between games and TapTap. High DAU games can increase and accumulate user groups for TapTap, so the company attaches great importance to the long-term value of games. Even if the short-term profitability of the game is not high, if it can form positive feedback with TapTap, the company is still willing to support the game.

The typical example is "Hotdog Party". Five years ago, there were so many chicken-eating games like this one, but most of the developers gave up after launching; "Hotdog Party" has been able to persist until now because it has formed a positive cyclic ecosystem with TapTap.

[2] Unique mechanism for self-research and transformation

There are many challenges to self-research, but the newly launched products have basically achieved the expected R&D effects recently. The company has achieved the necessary leap from 2D games to the current product and will pursue higher success rates and efficiency in research and production in the future.

Q: Will the international version of TapTap compete with products like Discord in terms of product form? What other aspects will the tool properties strengthen and cover?

A: Discord and TapTap are like QQ groups and TapTap in China, and don't have much competitive relationship.

In terms of game store properties (finding games), the core still depends on the game library function in this store.

The overseas TapTap product form will eventually be different from the domestic one because the ecosystem of overseas social platforms is very different from that in China. Tool properties and information recommendations are the most basic functions. Q: Only two self-developed games have been added at TapTap's release this year, which is a decrease compared to before. Does this mean the company is leaning towards operating existing games to reduce development investment? The game "Let's Depart Muffin" seems to cater to a niche audience. Are there any key R&D projects after "Eternal Restart Day", and if so, how is the progress?

A: The ratio of launched games will increase as they progress, so the percentage of newly developed games will decrease.

"Let's Depart Muffin" is relatively a small-scale game, so its investment is not as significant yet. However, we still believe that the type of this game has a relatively significant opportunity because this team has a successful experience in the AFK game category, such as "Daily Hitting Poli" and "The Immortal Ullala," and these types of games do not require significant development investment.

"The Eternal Restart Day" is still in the early stages, and we have higher requirements for its R&D and industrialization capabilities. The latter stage of the process will require significant investment, and it will also be a major focus of investment for the company in the future.

The specific progress of the game will still be publicly announced with our promotion and testing rhythms.

Q: What is TapTap's development plan for the international version, and will there be new business models in the future?

A: The business model is still mainly focused on advertising with no recent design of other business models.

However, the specific form of advertising will have many attempts. For example, this year we attempted search advertising, and video is also an area with significant commercial potential.

The development of the international version mainly focuses on the top countries to build the core user group.

Q: For TapTap's cloud gaming, such as playing "Genshin Impact" on it, the queue time is more than ten minutes; is it intentional due to higher costs? What are the costs regarding the server bandwidth and computing power? What is the revenue cost situation like?

A: The current number of cloud gaming users is alright, and we are mainly focusing on improving the experience for paying users. The free user experience will have discounts or issues like the extended queue period you mentioned.

For individual paying users, cloud gaming can be profitable. However, this will lead to deficits for free users. Therefore, we are trying to find a balance between profit and loss.

The overall cost of cloud gaming will decrease every year, and it's an iterative business of continuous optimization.

Q: Can games made by the Spark Editor only run in TapPlay mode? What experiments will be done in terms of commercialization?

A: The operation will be held in TapTap, but not necessarily in TapPlay mode. We may try other ways to cooperate more closely with TapTap.

However, it must be entirely bound with the TapTap ecosystem and impossible to operate outside of TapTap . The goal is to provide TapTap with more SKUs, filling up more content. Q: How does promotion on TapTap compete with buying promotion on Douyin (TikTok)?

A: Buying promotion is always better for game companies, it's just a matter of considering which investment yields a higher return. Our advantages are: 1) users are all game players; 2) our algorithm can further optimize the return on investment for our clients, and the platform data is all user data for game players; 3) We are closer to the developers.

Another big difference is that companies evaluate TapTap's return on investment (ROI) based on a more overall effect, not just the cost-effectiveness of individual users. They evaluate whether it is worth advertising on TapTap by comparing the natural flow and the promoted flow. This is the difference in how companies view TapTap compared to other channels.

Risk disclosure and disclaimer of this article: Dolphin Investment Research Disclaimer and General Disclosure